Europe-Based Truck Manufacturing Cartel Free Essay
Economics
Introduction
A cartel refers to an illegal agreement where producers decide to control the price of their output through the restriction of the number of products made available to the market. A perfect example of a cartel is the organization known as OPEC meaning Organization of Petroleum Exporting Countries (Bruneckiene & Pekarskiene, 2015). OPEC’s main objective is to maintain high prices for crude oil in the market by limiting the quantity supplied by its member countries, which are the world’s largest producers of oil. The OPEC cartel is not harmful as its effect is not to deceive customers, unlike the cartel, which was formed by Volvo/Renault, Daimler, MAN, Iveco, and DAF (Farrell, 2017). The cartel, which comprised Europe’s largest sellers of heavy and medium trucks was formed in 1997 and was in operation until the year 2011. The existence of the cartel was brought to light by a member of the cartel, an organization known as MAN, which received full immunity for the disclosure. The other cartel members were fined a total of a record high of 2.5 billion pounds sterling.
The Europe-based truck manufacturing cartel would agree on the prices of the medium and heavy trucks they would produce and the level of technology on emissions that would be installed on the vehicles. The increased regulations on the emission technology needed to be installed by car manufacturers to reduce the level of pollution through emissions were becoming more and more stringent in Europe. Members of the vehicle-producing cartels did not fail to uphold the standards put in place but they took a long time to implement them, meaning their clients would miss out on the new developments in technology about reducing the emissions (Farrell, 2017). The cartel’s main aim was to reduce the level of competition between the companies in question as they account for ninety percent of all heavy and medium trucks on Europe’s roads.
The whistleblower in uncovering the cartel was a member of the cartel who provided information concerning the cartel to the authorities in exchange for receiving full immunity. MAN provided information to the authorities on how the cartel worked and the mode of communication used. In the early stages of the cartel, the individuals involved were top-level managers who would meet during fair trade and other neutral events where their meeting would not be seen as suspicious and discuss the truck prices to be set (Farrell, 2017). In the year 2004, the price collusions were moved to German-based subsidiaries of the organization and lower-level managers were in charge of the cartel. Mistrust among the member of the cartel led MAN to come forward as a defense mechanism before other members approached the authorities.
Reasons why the European Commission Seeks to Disrupt Cartels and Prevent their Formation
Cartels promote the production and release of substandard products into the European economy. In most cases, members of a cartel control a huge portion of the economy’s market. When they collude to determine the level of specification of a product or a service being offered to the clients, they reduce the quality of the product as they aim to maximize their profits (Bruneckiene & Pekarskiene, 2015). The production of substandard goods about the world standards of similar product products major risk as the consumers are put at risk of being exposed to products that do not match the value paid for them (Dong, Massa, & Zaldokas, 2014). Substandard goods produced are usually of a lower quality, yet their prices are similar to those of standard quality. Thus, the existence of cartels in Europe causes European consumers to pay more for lower-quality products.
Cartels reduce the pace at which the European economy develops due to the various restrictions put in place to restrict the adoption of new technology in the production of goods. In production, the level of growth experienced by the economy is grounded on the new methods of production and the ability of firms in the economy to adopt the new technology (Bourreau, Sun, & Verboven, 2016). Cartels limit the growth of industries as the product released into the market needs to be of a similar quality, which will require the use of similar technology by all players involved (Dong et al., 2014). In such a situation, the efficiency of production units in Europe will be hampered by the existence of cartels, which dictate the methods that are to be used in production. The use of outdated production methods will reduce the overall productivity of the economy thereby reducing the rate of economic growth.
Cartels reduce the variety of goods available in the European market available to the consumer. Due to the market sharing agreements in cartels, certain members are awarded larger markets than others, which means that for the producers to maintain the market shares they have to produce a limited variety and quantity of goods about the market size (Bourreau et al., 2016). The aspect of market sharing limits the variety of goods that can be produced by a particular manufacturer. Thus, the European consumers may get a limited quantity and variety of goods given the market share allocated to the producers.
The existence of cartels in production reduces the global competitiveness of the products produced in the European market. The products produced in an economy that considers itself highly competitive in terms of world ranking need to meet various quality specifications. The standards set for the products, which are considered competitive internationally, are usually based on the latest technology and methods used in production (Schroeder & Tremblay, 2014). Therefore, due to the limited or non-existent use of modern technology by producers in cartels, European products are bound to be less competitive globally in terms of quality.
The existence of cartels in Europe will also reduce the efficient use of resources in the production process. Production is usually at its most profitable level when all of its components available to the producer are used in the most efficient manner (Schroeder & Tremblay, 2014). The efficient level of production is usually achieved when all of the previously mentioned factors can work without external interruption. The limited use of new technology imposed by the existence of cartels in Europe will act as an interruption to the effectiveness of the use of resources (Li & Guisinger, 2014). The non-efficient use of resources in Europe will trigger the increased cost of operations for European producers, which will lead to reduced profitability of firms.
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The existence of cartels will block the entry of new market participants to maintain the cartel’s market share. New competitors are usually edged out in the area of specialization of the cartels through the use of unethical practices (Li & Guisinger, 2014). Some of the practices used include setting the output prices below the costs incurred to produce a unit of the product. Such practice will lead to the products from the cartels being cheaper than those of the new firm in the market, and such a company will lack a market for its products. Thus, it will have to leave the market, as the company will be unable to cover the cost of production. The removal of new producers in the European market limits the variety of goods available to European consumers.
The graph above highlights the demand curve for firms in an oligopoly type of market. Cartels fall under this category. MR curve refers to the Marginal Revenue curve, the MC curve refers to the marginal cost curve, and the D curve represents the demand curve. In an oligopoly type of market, when a producer increases the prices of his or her products above P1, other producers are less likely to follow suit; consequently, he or she risks losing their market share. However, if a producer reduces the price of the products, other producers will also reduce their prices to protect their market share. Thus, the producers cannot set both the price and quantity of goods sold in a market as each is trying to maintain their respective market shares (Schroeder & Tremblay, 2014). Contrariwise, markets, which are characterized by the existence of cartels, can set the prices and the number of products as each participant is allocated a particular market portion. Such acts reduce customer welfare, as the quantity of goods available in the market is limited due to the market sharing technique by the cartel.
Importance of Competition to Consumer Welfare
Competition in the truck manufacturing sector in Europe will foster the production of high-quality vehicles. In any market, every producer aims to maintain his or her market share and increase it. Thus, in a competitive market, the producers are always aiming at producing products, which are of higher quality than the competitors (Li & Guisinger, 2014). To protect one’s market share the other producers will also follow suit by producing products of the same or higher quality. An increased number of high-quality products in the market from all producers creates a market that consists only of high-quality products from which the consumers can choose. In such a market, the consumers can get value for their money.
Competition among producers of trucks in Europe will increase the level of creativity and innovation in the sector. Creativity refers to the ability of a producer to come up with new and different ideas of how to modify his or her products to become more effective (Li & Guisinger, 2014). Innovation, on the other hand, about production refers to the ability of a producer to come up with new and improved ways of production to reduce the cost associated with the production process. Increased competition will trigger the need for producers to make their products unique and reduce the cost of operation to increase the profitability of the company (Schroeder & Tremblay, 2014). The innovations will aim to produce trucks, which are more energy efficient in terms of operations or trucks, which are more comfortable as the truck drivers spend a lot of time on the road in those trucks.
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Healthy competition among manufacturers of trucks will improve ethical practices in the market. Unwritten guidelines will develop, which ensure that the firms respect each other’s operations (Schroeder & Tremblay, 2014). The unwritten guidelines among the producers of trucks in Europe will ensure that the practices undertaken by the participants are ethical to prevent the development of negative relations among the producers. Healthy competition, therefore, provides an opportunity for new firms to enter the market without worrying that the other producers will collude to drive them out. The new entries will increase the variety of products available to consumers.
Reasons for Imposing Record Fines
First of all, the European Commission imposed a record fine to send a stern warning to companies or individuals who are operating cartels in the European market or individuals who want to start a cartel (Farrell, 2017). Secondly, the record fines were also imposed to compensate the consumers for the overpayment they made to the producers for the substandard products they received (Farrell, 2017). The amount collected was used to fund activities of the European Union that were previously funded by the citizens from the tax they paid thereby lowering the tax burden on the citizens. Thirdly, the fines were used to cripple the ability of the firms in question to use unethical practices to draw out new entries in the market. The firms would be unable to underprice their products by a huge margin to ensure the new producer did not achieve any sales, as they will be limited financially. Fourthly, the commission aimed to reduce the financial gains made by the cartel members over the years.
The Wrongs Made by the Cartel Participants
The commission found wrongdoing in the activities of the members of the cartel as they did not implement the emission specifications on time as required by the commission and they charged customers who bought trucks weighing more than 6 tons for the measures. Members of the cartel would meet and decide when to implement the new emission measures, which meant the consumers missed out on the new technology due to the long period the producers would take to implement it (Farrell, 2017). The charging of clients who bought trucks, which weighed 6 tons and above for the measures was illegal as the producer was supposed to absorb the cost and not pass it to the consumer.
Conclusion
The type of market created by the cartel was an oligopoly market where few firms existed and the actions of one firm would have an impact on the actions of the other firms. In a bid to reduce the competition associated with an oligopoly type of market, MAN, Volvo-Renault, Daimler and other cartel participants colluded to ensure that competition was nonexistent in the market. Competition between the producers was reduced significantly, as the factors that made products from a certain producer stand out were deliberated by all producers before a decision was made. The extra charges imposed on consumers were unethical, as the producers paid more for substandard products. The record fines imposed by the European Commission sent a stern warning and the possibility of individual customers seeking legal redress for the inconvenience caused by the cartel created a clearer image of the impact the cartel had on the consumers.
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